offshore procurement models - infosys bpm · the extensive interviews gave us rich insights on...

Portland

- Paul Millett, Director, Infosys Portland- Adam Crowe, Healthcare Practice Lead, Infosys Portland

Abstract

In 2014 Infosys Portland, previously the Portland Group, conducted a series of interviews with 10 global companies for a client in the services industry who was exploring the opportunities and challenges of setting up a procurement hub in Asia. The extensive interviews gave us rich insights on offshore procurement models being utilised by global companies and we capture them in this paper.

Firstly, this paper lays out the different levels of offshore procurement models used by global companies. All these different state levels (e.g., tertiary state) can provide an optimal procurement solution for a company in its current level of global reach. The paper then provides the key takeaways from the interviews. It assists to provide a comprehensive set of tools that can be used to determine the best-fit procurement model when expanding the global reach of a company. For companies who are re-examining their current model, the balance of the paper assists companies when reviewing their 3-5 year strategic global procurement plan.

OFFSHORE PROCUREMENT MODELS The constantly evolving optimized state

WHITE PAPER

External Document © 2015 Infosys Limited

Part 1 Definitions & Key Findings

The four states in the offshore procurement model evolution

The four levels of offshore procurement

initiatives include: base, primary, secondary,

and tertiary.

Base State: This is defined as enterprises

with global suppliers and customers that

have yet to establish offshore procurement

operations.

Primary State: A natural progression

from the base state is establishing an

International Procurement Hub (IPH) which

marks the transition to a primary state. This

transition is often driven by a combination

of factors including:

• Growth in offshore suppliers

• Strong growth in offshore customers

• Establishment of offshore business units

GEO, Global system interfaces

IPH Outsourcoed or Insourced

IRSO, Supply Chain Management, and BPO

Local or NationalBase State Primary State S

econdary State Tertiary State


Secondary State: An IPH delivers lower costs with better leverage of global purchasing power, lower labour costs in some countries, and attractive government incentives (such as tax). However, these benefits can be quickly eroded if the design is overly driven by financial engineering factors. A company may experience higher operational costs in the IPH and increased process inefficiencies from having to redirect procurement activities via the IPH to support its viability without much commercial benefit. But when strong alignment is maintained with suppliers and customers and a thorough due diligence is carried out to determine the categories and functions that should fall in the IPH’s purview, then the IPH is supported by operational factors rather

than financial engineering factors.

Companies that have pursued these

fundamentals have moved to the

secondary state where they have achieved

efficiency improvements and new supplier

advantage. These benefits translate to

supply chain improvements by connecting

into global purchasing organisations

(GPOs), or outsourcing transactional

procurement activities via business process

offices (BPOs), or tapping suppliers directly

through international regional sourcing

offices (IRSOs).

Tertiary State: This state is where

technology and systems deliver the

highest combination of efficiencies and

effectiveness. Technology and systems

overlap all procurement and supply

chain activities and can help tap into

Global Exchange Organisations (GEOs)

to create the highest level of efficiencies

not only within the company but within

the industry which it participates in. In

addition, system integration covers sales,

expenditure, and costs. It should be noted

that not all industries have readily available

GEOs to improve efficiencies.

Infosys Portland has assisted several clients

with these complex offshore structural

changes using the global office network

of its parent, Infosys, and its own offshore

subsidiaries and partners. With deep dive

analysis and careful planning, we have

identified solutions to address these

challenges in a way that both operational

and financial benefits can be delivered.

• Inter-connection with global exchanges• Comprehensive system integration across all levels

• Sourcing hubs expanded within regions or countries• BPO includes category management and new functions

• Sourcing hubs expanded within regions or countries• BPO includes category management and new functions

• Procurement Hub expands further into supply chain and new functions• Hub insourced• Hub provides trading



• Components of local and national management structure remain



• National, state, and local procurement & supply chain management• Onshore & offshore suppliers• Onshore & offshore supply chain activities but no management located offshore

Base State

Onshore

O�shore

O�shore

O�shore

Primary StateSecondary State

Tertiary State

Optimised level can exist at any state

Leve

l of O

ffsho

re P

rocu

rem

ent U

nits

Level of Global Reach


Key takeaways from interviewsWe interviewed companies from a wide range of industries who have implemented or are implementing primary, secondary, and tertiary states of international procurement solutions. Key takeaways include:

Commercial factors• Ensure the procurement hub’s

viability is supported by commercial factors alone before considering tax advantages This will help avoid implementing sub-optimal management structures simply to obtain tax benefits where the management costs could quickly erode all tax benefits and threaten the long-term viability of the offshore procurement hub.

• Look at your suppliers for talent It can help address lack of talent in some locations or intense competition for talent in others, such as Singapore.

• Examine both the location of your supplier’s manufacturing bases and their regional or global sales and account management This is essential to determine the most suitable location for a procurement hub. These personnel are the key decision-makers for global deals.

• Category support does not need to be co-located with your global category management Some clients have implemented external BPOs which provide category support to the IPH which is domiciled in another country.

Financials• Savings. Target savings of more than

5% have been achieved by most clients who established IPH or BPO through amalgamating spend, streamlining processes, and using favorable regional pricing to benchmark globally with multinational companies.

• Trading operations can be routed through an IPH and supply chain management This provides further net income to be earned by the IPH which could be located in a tax-effective jurisdiction. These activities need to be strongly

supported by factors such as proximity to supplier warehouses and global trading hubs; for example, diesel out of Singapore.

Technology, systems, and audits• IPHs should tap into technology

enablers such as global exchanges if available An example is the Global Healthcare Exchange in the U.S. and Europe used by IPHs and GPOs to transact, trade, and improve supply chain processes and contract management for healthcare products.

• System upgrades are required in an IPH but not necessarily in the base system technology (e.g., SAP, Oracle)Upgrades required are normally in the overlay reporting systems across all platforms to enable improved catalog usage. Infosys Portland delivers this service with their procure-to-pay (P2P) system.

• New systems. In cases where the IPH includes new trading activities, new systems need to be implemented.

• Regulatory scrutiny This can be an efficient process if the right advice is sought upfront and strong planning and implementation delivers robust policies and procedures.

• Your IPH may not only serve the objectives of your own company but they may also serve some of your “friendly peers” Whether it is in the form of an IPH or a GPO, you may find a new source of revenue that can be driven through the international office by providing a service to some of your own suppliers or partners. This would require amalgamating expenditure across companies including your own for mainly indirect spends.

External Document © 2015 Infosys LimitedExternal Document © 2015 Infosys Limited

BackgroundHistoric data of the past seven years shows that apart from commercial drivers, global economic events have played an important part in establishing an IPH. The global financial crisis reduced or eradicated growth in many markets. Companies responded by driving down costs with their suppliers. International companies sought improved buying power by amalgamating regional and global spends.

With manufacturing moving more and more to Asia and the financial meltdown, many IPHs were established in Asia during 2008–2009 with either a regional or global focus. Additionally, BPOs were established

Part 2Identifying the best-fit offshore procurement model

mainly in India and the Philippines to reduce transactional costs. Furthermore, GPOs and GEOs were established mainly in the U.S. and Europe to amalgamate expenditure within certain industries to obtain lower prices and reduce supply chain costs.

Expansion and development initiatives by the Chinese government fueled a commodity boom during 2010–2011 which led many major mining companies to establish IPHs in Asia. For most of these companies, operational and procurement benefits were the key factors with tax reduction providing further advantages.

During 2011–2013, the banking sector improved, in particular in Australia, which provided further impetus for IPH and BPO growth in Asia and Europe for a number of banks.

In 2014–2015, more CEOs are shifting their strategies to global growth rather than just organic growth. Many companies are advanced in their global growth objective adding further pressure to existing procurement structures. These companies are driving demand for IPH, IRSO, GPO, and BPO solutions in all regions.


Characteristics of an optimal offshore procurement structure

The best global procurement structure for a company requires sustainability, flexibility, and elasticity. Often, procurement teams are tasked

with quickly delivering cost efficiencies from local or global acquisition. Sometimes even before one acquisition is absorbed, another

acquisition changes the playing field. Hence, a further capability is required – scalability.

The progression of a global procurement structure is as follows:

Model Types Driving Factors StateLocal / regional hub • Main suppliers only have a regional footprint

• Company operations are heavily weighted to the local market

• Global suppliers managed via local / regional offices to meet local market needs

BaseRegional and global deals in certain categories

• Main suppliers have a global footprint

• Supplier manufacturing bases are concentrated in global regions

• Company operations are growing offshore

Selective external (outsourced) IPH • Used when first establishing global procurement offshore

• Most external (outsourced) IPHs are based in the US and Europe

• External models in Asia mainly cater to indirect spendsPrimary

Commodity-based internal IPH • IPH established with main aim being to access global deals

• Often deployed when a select number of strategic commodity-based spend categories are available with trading market in proximity to IPH; e.g., diesel in Singapore

Internal IPH with ‘surgically’ selected categories with regional sourcing (IRSO)

• IPH established with the main aim being to achieve better global deals for selected strategic categories

• Surgically selected categories and/or sub-categories

• Often supported by local sourcing teams in key manufacturing regions for selected categories; e.g., China)

Secondary

Internal IPH, regional sourcing and supply chain

• All of the above with supply chain management activities added (e.g., control of 3PL / 4PL partners for global categories)

Internal IPH , supply chain connected with a GPO and an External BPO

• All of the above plus addition of global BPO partner(s) for selected processes, e.g., PR-PO, tactical buying, analysis & reporting, Master Data Management (MDM)

• Wider category management feasible in BPO but for selected non-core spend categories (e.g., indirect)

• IPH uses GPOs for selected spends and price tracking

Global insourced IPH with CPO governance role, GPO usage for certain spends, and external (outsourced) BPO. The IPH could use the services of a GEO if it exists in its industry

• Addition of global procurement governance roles (e.g., Chief Procurement Officer (CPO))

• Often involves ‘hard line’ reporting from procurement teams in other geographies globally to drive compliance

• All major spends are managed from IPH

• GPO is used for certain spends where internal amalgamation does not realise sufficient purchasing power

• Main aim is to pass as much expense through BPO to obtain labor and efficiency benefits

• GEO used if available for supply chain, price-tracking, and working capital management

• System enhancements providing efficient and effective commercial integration between procurement and supply chain and sales, both globally and locally

Tertiary


To determine the right mix of procurement

model, a filter process is needed that can

be moulded over time to fit a company’s

ever-changing corporate structure.

Reviewing the offshore restructuring initiative

The traditional steps undertaken to review

any offshore restructuring are as follows:

Strategic alignment

• Examine the strategic objectives and

current initiatives of the company and

identify the changes needed in the

current procurement framework to

align and support these objectives

• Review the suppliers, organization

framework with regard to sales and

manufacturing bases

Geographic spend assessment

• Determine the spend (including capital

items) that can be managed offshore,

regionally, or globally, leaving other

spend to be managed nationally or

locally

Procurement assessment suitability

• Determine the quantum of expenditure

that can be managed globally for each

category

• Complete price benchmarking on

a global basis and review supplier

profitability

• Estimate the improved total cost

outcome (TCO) that can be achieved

from this amalgamation

Function assessment

• Identify which functions of

procurement should be managed

offshore – sourcing (IRSO), category

management (IPH), contract

management, transactional processing

(BPO), supply chain (GPO), and

technology improvements (GEO)

• Identify the enablers

Location assessment

• Assess the alternative locations of

the offshore procurement activities

using the following criteria with your

preferred weightings:

Skills, talent, culture, and language

Proximity to supplier sales hubs

Proximity to key internal

stakeholders

Political and regulatory stability

Establishment and running costs

Sustainability and ethical standards

Government incentives (e.g., labor

rebates, taxes)

• A more expansive list provided by the

Journal of Procurement and Supply is

worthy of consideration. “International

purchasing offices: Literature review

and research directions” (2012),

Sartor, et al.

Internal (in-house) or external (outsourced) solution

• Determine the TCO of internal and

external solutions in that location

• Identify the components of

procurement and their location and

map out the projected timescale of

implementation

Risk review

• Identify the risks and determine the risk

mitigation strategies

Operating model design and plan

• Identify any other uses for the IPH or

BPO besides traditional procurement

activities, e.g., acquisition vehicle

• Compare TCO against the total benefits

delivered under your model and

determine whether there is sufficient

profitability

• Map out a timescale for these activities,

e.g., set up an IPH in Years 1 and 2 in

Singapore and follow this by establishing

a BPO in India in Years 3 and 4

• Determine your system requirements.

Infosys Portland’s P2P system provides

a complete overlay across all systems

which extract data for diagnostics and

assist global companies in assessing

their expenditure across a number of

regions


This filter process can be depicted in the following diagram

Target Spend Determination

High Level Price Benchmaking

Functonal Assessment

Category Suitability

GovernanceStrategicProcurementSourcing

Tactical ProcurementSupply ChainTransactional Procurement

Location Assessment

In-House or Outsource Solutions

Risk Review

Operating Model Design & Plan

RemainLocal orNational

NoGlobal Vs Nationalgrowth expectationsRegions of key growthBusiness unitgrowth ambitions

Concentration of global supply market(for key categories)Global Value PotentialProcurement & Supply ChainOperational E�cienciesFinancial

Strategic Alignment

It can be an iteractiveprocess


The offshore procurement office can

perform several functions as follows:

• An internal IPH:

With focus on governance,

category strategy, and category

management for certain spends

Whose activities include the above

plus trading services and supply

chain

Whose activities include the

above plus support services such

as contract management, data

analytics, and reporting

• An IPH with some of the above

outsourced; most companies prefer

governance and major direct category

management to be internally managed

• An IRSO, normally co-located in

the country where supplies are

manufactured to enable closer

management of the sourcing activity in

that country or region

• An internal GPO whose sourcing

activities are regional or global

which can have a trading delivery

mechanism (they offer a buy / sell price

whose margin is embedded within

the price) or a more procurement-

orientated service where they charge

a commission for the time devoted to

completing the sourcing

• An external GPO whose sourcing

activities are regional or global; the

GPO can simply have a purchasing

focus or additionally assist with

supply chain activities or provide a

technological exchange for both these

activities (GEO)

• An external BPO which provides

support services to the IPH in some

or all of category management, data

analytics, spot buying, or transactional

support. Many companies are prepared

to embrace a higher form of BPO

outsourcing with one of the key drivers

being labour cost savings

IRSO GPO

BPO

GEO

IPHStrategy

Sourcing

Category Management

Tactical Procurement

Supply Chain

Transactional ProcurementPurchasing & PaymentContract AdministrationPR to PO ConversionInvoice Matching &Processing

Functional Governance ( CPO )Business StrategyGeographic StrategyTechnology Strategy

Strategic SourcingTender ManagementGroup Raw Material BuyingO�shore Trading Partners

Catergory ManagementVendor ManagementDemand ManagementSpend Data Management

Spot buyingContract MangementTail Spend Management

DIFOTInventory Management Demand Mangement

Functional Scope

Insource

Outsource

Judgement intensiveTransaction intensive

Functional assessment and design

Functional design and coverage is best depicted in the following diagram


Internal and external models

A global model should consider both

internal and external (outsourced)

procurement structures and the way

they interlink in their design. Outsourced

solutions exist in all areas of offshore

procurement –from sourcing to category

management, supply chain, and business

processing. The challenge is finding the

right sustainable fit.

The right offshore model not only applies

to category management strategy but also

to sourcing, supply chain, and transaction

processing strategy. It can also create a

positive ripple effect on the other side

of the fence – revenue collections and

processing. Therefore, careful review of

both internal and external solutions is

needed, some of which may change your

risk profile, e.g., alignment with sourcing

entities can deliver more of a trading

solution rather than a purchasing solution.

IPHs tend to be outsourced mainly for

indirect categories. Infosys Portland

provides this service for both direct

and indirect categories in Australia and

Singapore through its Managed Services

Division.

IRSOs can be external or internal and can

provide a trading service (buy / sell pricing

offered) or an advisory service (where a

fee is paid). Infosys Portland established

an advisory arm in China in 2007 which

is now managed by external parties and

rebranded under the banner “Fonssino”.

BPOs are outsourced across most

functions of procurement and at many

levels. Transactional procurement can be

outsourced fully. As the level of judgement

intensiveness increases in the procurement

functions, the level of outsourcing tends

to reduce with governance normally not

included. Infosys Portland provides its BPO

service from Pune, India.

GPOs, in this paper, represent an offshore

vehicle which identifies the suppliers from

which it will source goods and services and

capital equipment. It inevitably involves

some form of supply chain management.

If an outsourced GPO model is adopted (an

external vehicle is engaged), it is expected

that some form of aggregated purchasing

power is achieved by combining the

volume of several companies.

GEOs are technology platforms which

maximise automation in supply chain,

contract management, quality assurance,

price tracking, and inventory tracking.

GEOs are used by GPOs and IPHs to ensure

probity and accuracy on high-volume

transactions and as a source for price

benchmarking. They are mainly available in

the U.S. and Europe, an example being the

Global Healthcare Exchange (GHX).

Risk review

Key risks that require mitigation

strategies include:

• Key procurement resources

possess insufficient skills to

develop and manage categories

globally from the offshore hub

• Key internal stakeholders are not

fully engaged

• Business procurement behavior

does not change within the

company locally or regionally, so

full benefits are not achieved

• Suppliers do not provide

improved pricing on

amalgamated spend

• IPH and BPO operational costs

increase

• Higher foreign currency

exposures arise

• Tax office scrutiny occurs

Infosys Portland can assist with

solutions to mitigate these risks.

Conclusion The longevity of offshore procurement

models such as IPH, IRSO, GPO, or BPO

can be assured if they deliver sustainable

commercial savings and profitability

from procurement and operational

drivers alone - before any financial

engineering benefits are included.

Of course, the strategic direction of one’s

own company and potential structural

change is the first factor to consider

when examining a preferred location.

However, a key due diligence activity

in determining the preferred location is

to closely examine the organizational

structures of suppliers with a focus on their

sales and account management structures

as well as their manufacturing bases.

Ideally, their future structural changes and

developments (e.g., new manufacturing

bases) should be understood. This analysis

will ensure longevity with sustainable

operational benefits flowing from supplier

innovation, process improvement, and

simply proximity to key decision makers.

You just might find that your suppliers

are a source of talent as well!

Infosys Portland‘s global network

of offices and expertise can deliver

the best-fit procurement and system

solutions to cater to your global

expansion plans and address the

omnipresent challenge of finding the

optimal state.


Paul Millett

Director, Infosys Portland

Paul Millett is a Director with Infosys Portland and manages key relationships in developing, selling, delivering

consulting and BPO services and solutions to key clients across all industry sectors.

Paul has over 17 years of experience with the FMCG industry and has held supply chain consulting roles across

blue chip organizations globally, including Mars Europe, Accenture UK, WCI Group UK, AT Kearney, and Portland

Group. He has developed supply chain and procurement strategies and delivered sustainable solutions in grocery,

retail, FMCG, financial services, building materials, construction, telecoms, distribution, aerospace, healthcare,

government, refining, and steel and mining industries for clients including J Sainsbury (UK), Cadbury Schweppes,

Telecom NZ, Qantas, British Airways (UK), Rolls Royce (UK & Asia Pac), Boral, CSR, Onesteel, Caltex, Virgin Australia,

World Bank, Westpac, and various NSW government agencies.

Adam Crowe

Healthcare Practice Lead, Infosys Portland

Adam Crowe joined Infosys Portland to lead its Healthcare Practice. He is a non-executive Board Director of

Holdsworth Community Services which provides services to the aged and people with disabilities. He is also

a non-executive Director of Two Sides Aust. which is a sustainability advocate which dispels the myths and

presents the facts on paper-based products

Adam has over 20 years’ experience in international procurement, sustainability, and treasury management.

He has led a consulting review of a $1B offshore procurement hub for one of the leading service providers in

Australia and a smaller procurement hub for a leading Australian vitamin company. He was General Manager,

Procurement & Sustainability, at PMP Ltd., for 11 years managing $800M of global procurement exposure,

covering paper, chemicals, logistics, energy, media services, property, and labor. He was a key contributor to

PMP having one of the world’s highest print margins in FY12. Prior to PMP, he ran the global treasury for P&O

out of London managing $5B of treasury and commodity risks. His experience in sustainability covers forestry

and water treatment management.

About the Authors

© 2015 Portland Group Pty Ltd. All Rights Reserved. Portland Group, a subsidiary of Infosys BPO, believes the information in this document is accurate as of its publication date; such information is subject to change without notice. Portland Group acknowledges the proprietary rights of other companies to the trademarks, product names and such other intellectual property rights mentioned in this document. Except as expressly permitted, neither this documentation nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, printing, photocopying, recording or otherwise, without the prior permission of Portland Group Pty Ltd. and / or any named intellectual property rights holders under this document.

About Infosys PortlandInfosys Portland is a subsidiary of Infosys BPO Ltd., a part of Infosys Ltd. Its mission is to improve the e�ciency and e�ectiveness of its clients’ procurement and supply chain activities. We achieve this by providing thought leadership, specialist subject matter expertise, a global delivery model, and best-in-class technology solutions. By increasing the value delivered and improving the e�ciency of procurement and supply chain operations, our clients are able to achieve more for less.

For more information, contact [email protected] www.infosysportland.com

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